ASIC warns on spruikers as SMSFs leverage into property

ScreenHunter_01 Apr. 13 10.29

By Leith van Onselen

The Australian Securities and Investments Commission (ASIC) yesterday released a report on Self Managed Super Funds (SMSFs), which summarises the findings of its 2012 investigation into risks in the SMSF sector, based on 18 entities that provided a financial service involving the establishment of an SMSF.

The Report shows that SMSFs are the fastest growing sector of the superannuation industry, both in terms of the share of assets under management and in the number of funds. As at 30 June 2012, there were over 478,000 SMSFs, with the sector now accounting for nearly one-third of superannuation assets in Australia, following average growth of 7.7% per year over the past 10 years (see next chart).

ScreenHunter_04 Apr. 19 10.12

In terms of total superannuation assets held, SMSFs are now the largest component, with the proportion of assets held by SMSFs more than doubling from 15% in 2000–01 to 31% in 2011–12 (see next chart).

ScreenHunter_05 Apr. 19 10.18

SMSFs are primarily held by older Australians, with 76% of SMSF members aged over the age of 50. In comparison, those over the age of 50 account for only 42% of public sector funds, 28% of retail funds, 26% of corporate funds and 19% of industry member funds (see next chart).

ScreenHunter_06 Apr. 19 10.21

The desire to have ‘control over investments’ is the key driver of the growth in SMSFs, with 59% of those surveyed citing this as a key reason for setting up an SMSF. Other major drivers include: the ability to choose specific stocks to invest in (38%); and the ability to make better investments than superannuation funds (27%).

Smaller funds tend to make more conservative investment choices, holding a greater proportion of cash, debt securities and term deposits than bigger funds, which tend to be more diversified (see next chart).

ScreenHunter_07 Apr. 19 10.27

Finally, nearly one-fifth (18%) of self-managed superannuation funds have borrowed to invest in real property. Of these SMSFs, the median amount borrowed was $350,000, the highest amount borrowed was $870,000, and the lowest amount borrowed was $22,803. SMSFs with more than $200,000 in assets were most to have investments in domestic property.

The report notes “concerning pockets of poor advice”, particularly in relation to recommendations that investors start an SMSF to borrow and invest in real estate. It also warns that “unlicensed financial advice in the SMSF sector will be a focus for ASIC in 2013 and we will be taking regulatory action against unlicensed operators”, noting that it would target property spruikers, in particular.

[email protected]

www.twitter.com/Leithvo

Comments

  1. Would this explain the recent apparent over representation and activity of investors on the property market and consequent (limited) price gains?

    • Yes, as NG/losses inside a SMSF can increase the capital contributions levels and save tax on the way in. It is a rort that must be shut down asap.

      • thomickersMEMBER

        nah its the middle class dual income ($60k + $60k) couples doing it. you require both people to be fully employed and Salary sacrifice in order to meet the schedule repayments. bound to end in tears if one becomes unemployed.

        the upperclass (1%) already have assets. they don’t need to borrow.

      • Thanks for the clarification.

        What % investing into geared property and using losses/increased cap contributions are we talking about?

      • innocent bystanderMEMBER

        I respect, and agree, with a lot of what u say Willy but “can increase the capital contributions levels” isn’t correct, you can only increase your contributions up to the cap, you can’t increase the cap.

      • Well, not quite…
        http://investorassist.com.au/articles/buying-investment-property-self-managed-super-fund-pros-and-cons

        Correct me if I am wrong…
        From another forum for investors…

        “I believe losses are held within the fund, so negative gearing doesn’t really apply to SMSFs. You can make additional contributions to super to cover the losses, and being volentary super contributions these are only taxed at 15% instead of your regular tax rate”

        “Certainly a loss in a SMSF cannot be deducted in your personal tax return but a contribution to a SMSF can usually be deducted in your return or if you are a wage earner you can utilise salary sacrificing to reduce your taxable income before it even reaches your tax return. For example, the super fund may have a rental property that is generating a $10,000 loss, this means if you contribute $10,000 in deductible super contributions to the fund it will not even have to pay the 15% contributions tax on that money and you or your employer will get a full tax deduction for the amount so it is as good as claiming the rental loss in your own return with the added advantage of asset protection. If you make enough superannuation contributions for the fund to be able to pay principle off the loan then the principle repayments are effectively taxed at 15% rather than your marginal rate if the property was held in your name. If you have some non cash flow deductions such as depreciation the 15% contributions tax won’t even apply to your principle repayments.”

        http://www.yourmortgage.com.au/article/smsf-property-investing-are-you-your-own-hero-119912.aspx

      • thomickersMEMBER

        you can offset your contributions tax liability with interest expenses (negative gearing) or franking credits (australian equities)

        The main strategy of SMSF property is to eventually move it to pension phase where the CGT liability is $0 if sold.

      • thomickersMEMBER

        willy,

        “can increase the capital contributions levels”

        do you mean paying down the principle of a loan more tax efficiently?

      • thomickers
        Not sure what I mean now 🙂 I really will have to seek some more advice on this, but at the very least it seems there are tax advantages for some to buy/gear property in SMSF’s. The next be tax handout next to NG in general…

      • innocent bystanderMEMBER

        yes Willy, think yr heart and ideas are in the right place but if one of your facts are wrong then the vested interests will discount all of your ideas.
        in general terms one is better of neg gearing outside of SMSF depending on yr marginal tax rate, which for most investors would be probably be higher than the 15% tax inside super.
        as Thomickers said above the real kicker to having a speculative property, or any appreciating asset,inside super is to avoid CGT when you sell it by being in pension mode, 0% tax currently, but not if Labor’s new changes get thru cause then they will pay 15% on income over $100k. probably still better than personal marginal rate tho. Of course this assumes the asset goes up in price 🙂
        A big gotcha some small SMSFs can’t see coming is they need the cash flow to pay the loan, and if in pension mode they need to pay a minimum of the fund as pension each year also – which could make them a forced seller at an inconvenient time.
        FWIW I can’t for the life of me see why the govt allows super funds, SMSFs, to borrow.

      • Guys, re: the NG etc… Contributions tax (the 15% tax paid on tax deductible contributions paid to the fund), as well as other expenses (admin, insurances etc), are all able to be used to offset other taxable earnings (income, capital gains).

        The actual benefit of this is max 15%. In many cases it’s less.

        For 85% of people the only reason you would consider buying within super would be to cash in on the benefits of moving to pension phase (where all earnings & gains are tax free). …for about 5% of people we might consider it for asset protection reasons (particularly if they have a business, or prone to lawsuits ). …for about 5% it’s so they can buy a factory/office which they then lease back to one of their companies (strict rules surrounding this, covering most of the obvious loopholes here). For the other 5% it’s purely so they have something to talk about while out on the golf course.

        Still, for most people it still doesn’t add up.

        Say you’re earning $100k p.a. Property purchase is $600k with $500k loan. Interest rate 7% ($35k). Rental return 4% ($24k).

        If you have it in super you need to be able to get at least $11k p.a. into super to service the loan.

        Outside of super you also have an $11k gap you need to fund.

        As an investment property both are essentially costing about the same (actually, expect setup & admin costs on the SMSF of ~$5k to setup, $2 – $3k p.a. for tax/audit, plus interest costs are usually higher).

        Say you lose your tenant and the place sits uninhabited for 12 months. All of a sudden you have a $35k gap on the loan you need to service.

        If you held this in your own name that $35k is fully deductible, so the net cost would be around $22.2k.

        If your property is in super you can’t just throw $35k in and claim a deduction. You can claim $25k (across the year, in total) as a deductible contribution; the rest of the $10k (plus admin, audit & tax expenses) has to be paid in as cash (after-tax) contributions…. so in pre-tax terms, that’s $25k (from tax deductible cont’s) and $16.2k ($10k net @ MTR+M/C 38.5%) …so total $41.26k.

        Also unless your SMSF has other income/realised gains that can utilise the losses and expenses then tough luck.

        Contrary to popular opinion, for most people property investment via super isn’t as super as it’s made out to be.

        A lot of accountants out there have seen the easy money in SMSF tax/audit and recommend it to anyone with a heartbeat and $100k of super… in my opinion you need a pretty good reason to justify a SMSF will less than about $350k…. most benefit doesn’t really kick in till $700k+, and even then it’s not for everyone (compliance, regulation etc).

        In the last 10 years I’ve shut down probably 4 or 5 times more SMSFs than I’ve started up.

        (again, asset protection is a benefit, but this has nothing to do with where the money is invested or whether a SMSF is used)

  2. Haha, this is amazing. This country is putting more and more of its eggs into the property bubble basket. So many people will be left with nothing at the end of this.

    I feel evil but I actually look forward to these bubble enablers losing it all, and then some. Especially the ones that criticize my generation for whinging.

    • I can’t wait to hear the “We could not possibly have seen this coming.” type arguments.

  3. Personally I reckon this is the next storm financial debacle, a lot of people that are pushed the SMSF by their accountants have no idea of their responsibilites as trustees.

    Most would be better served by wraps that have term deposits.

    I have seen a number of instances where a financial service firm who is the accountant, set ups the SMSF, who has an inhouse advisor and a mortgage broker and a property consultant all separate entities but cross ownership provide the strategy , the property and finance, unfortunatly they have been focused on the mining sector and selling the properties in mining towns. Will be interesting to watch

    • Totally agree, this is fertile ground for the spruikers, shysters and spoilers.

      I note the banner add on the page is for an SMSF company.

    • tax minimization should be way down on the list of things to consider when coming up with an investment strategy (especially near retirement). Which is why Accountants shouldn’t even be able to advise in the set up of SMSF’s.

      • Mining BoganMEMBER

        Ha! Yes. I watched them all flounder in that. They called me an idiot for not jumping in.

        I watched the Storm Financial debacle. They all called me an idiot for not jumping in.

        Now they’re all jumping into this latest one and they’re still calling me an idiot..

    • Jack

      I have seen a few of those deals and it cares me that no independent third party has scrutinised the deal. I saw one property developer who pays for the Financial advice from their own related party Financial
      Adviser who just also happens to be an Accountant with a brother who finds the mortgage. sCARY!

      • I don’t have a problem with the commissions involved, but having everything bundled in-house almost guarantees that none of what is being provided is “advice”.

        One of the problems is that property isn’t classified as a financial product (and hence unregulated), so none of the spruik is technically advice (and hence there is no such thing as “bad advice”).

        At least if a bad (regulated) investment is recommended you can sue your adviser!

  4. This will be good for the future because the older generation that couldn’t be bothered saving and who now is sucking off us in the property market will fall on their swords. There will be massive cut backs on social services, retirement services, drugs and hospital care and this basically will cull of the older generations once the bubble pops. ASIC is too little too late, and that has been their theme song for a long time.

    Deregulation of everything for profit and greed is coming to a climax.

    I think SMSF’s were just pure greed and an easy way out for government because of decades of slax governance.

  5. And we believe ASIC because…its run by a man who trumpeted secrutitisation as the way of the future?! I suppose it was…and look at where we are….
    “Can I just firstly clarify your position at Societe Generale, which is now the subject of lawsuits in the United States. Now, it’s being sued – accused of making false and misleading statements in regard to securitisation. Now you’re not named in any of the suits, but did those things happen on your watch?

    GREG MEDCRAFT: Well, they are allegations in the United States. As you say, I’m not named. I was responsible for oversight of the structuring, advisory side of securitisation of Societe Generale in respect of securitisation. I wasn’t responsible for the sales, syndicate and trading of securitised debt products. That particular division …

    ALAN KOHLER: I’m not sure that’s a distinction that many people will understand. You were the global head of securitisation, right?

    GREG MEDCRAFT: Yeah, and the – that’s correct. And what I was responsible for was the structuring and advisory of the securitised products. That division did report to me. And, you know, in terms of what I’ve said previously, I guess they are allegations. I can’t really comment any further on that because clearly I’ve signed confidentiality undertakings with the bank in leaving.

    ALAN KOHLER: Are you confident that under your watch, in areas that you were responsible for, there were no false and misleading statements made, no fraudulent behaviour. I mean, can you be sure of that?

    GREG MEDCRAFT: Look, I think they’re matters for the court.”
    And it goes on….
    http://www.abc.net.au/insidebusiness/content/2011/s3377460.htm

    • Nice catch Janet,
      Worth the read!!

      I saw this at the time, AK was being affable & missed a few hard questions at the time, & still shredded him in this interview, he has No credibility.

      Then he obscures the MF Global theft, it was a Futures bet that Corzine had, & anyone with money in Any of the pools of ‘segregated’ accounts were frozen!

      Their differently named pools worked in very much the same way regardless of whether being futures, options, Or CFD’s – so why the distancing? At that time there was an ‘establishment’ drive to smear CFD’s because they felt their SFE business was being threatened. CFD’s were only a small part of MF….! So who was he batting for? & AFAIK besides a few ‘warnings’ Nothing has changed!

      I can tell you, when SHTF you’re very much on you’re own!

  6. The last source of funds for the property bubble is being tapped. This is akin to when the taxi driver starts talking to you about his share investments.

    Not long to wait now.

      • russellsmith55

        Yeh I’ve got a modest but good savings account ripe the taking. Better to steal the money from that to ensure housing is still too overpriced for people like me, than let natural market consequences come to the a##holes that made it so overpriced in the first place.

        They can also raise taxes against my income and give it to away to low-income types to enter into a crippling mortgage to ensure I’m the one paying to ensure housing is still too overpriced.

        I hate this country sometimes.

  7. Wait a minute….I know what that’s called
    “ASIC regulating the Spruikers”
    That’s an Oxymoron!
    Is there any prize for being the first to recognize this?